sufficientȱassetsȱareȱinȱtheȱfund,ȱtheȱentityȱwillȱhaveȱnoȱlegalȱorȱconstructiveȱobligationȱtoȱpayȱtheȱrelatedȱ employeeȱbenefitsȱdirectly”.ȱȱApplyingȱthatȱdefinitionȱtoȱtheȱsituationȱdescribedȱinȱparagraphsȱ2.39Ȭ2.41ȱ aboveȱwouldȱhaveȱprecludedȱaȱnetȱpresentation.ȱȱTheȱIASCȱadoptedȱaȱrevisedȱdefinitionȱinȱ2000ȱwhichȱ removedȱthatȱconditionȱandȱadoptedȱinȱitsȱplaceȱaȱrestrictionȱthatȱtheȱfundȱ“existsȱsolelyȱtoȱpayȱorȱfundȱ employeeȱbenefits”.ȱȱTheȱIASC’sȱreasoningȱforȱmakingȱthatȱchangeȱtoȱallowȱaȱnetȱpresentationȱtoȱbeȱusedȱ moreȱwidelyȱincludesȱtheȱviewȱthatȱ“theȱrestrictionsȱonȱtheȱuseȱofȱtheȱassetsȱcreatesȱaȱsufficientlyȱstrongȱ linkȱwithȱtheȱemployeeȱbenefitȱobligationsȱthatȱaȱnetȱpresentationȱisȱmoreȱrelevantȱthanȱaȱgrossȱ
presentation,ȱevenȱifȱtheȱentityȱretainsȱaȱdirectȱobligationȱtoȱtheȱemployees”.ȱȱHowever,ȱitȱalsoȱ
acknowledgesȱthatȱitȱisȱ‘inconsistent’ȱwithȱderecognitionȱandȱoffsettingȱrequirementsȱinȱotherȱstandards,ȱaȱ
‘pragmaticȱexception’ȱtoȱitsȱgeneralȱoffsettingȱcriteriaȱandȱthatȱtheȱnewȱdefinitionȱcontainsȱanȱ‘arbitraryȱ restriction’ȱtoȱachieveȱit.6ȱ
2.46ȱ TheȱreasonsȱforȱtheȱpresentȱrequirementȱofȱIASȱ19ȱtoȱgiveȱaȱnetȱpresentationȱinȱsomeȱ
circumstancesȱwhereȱtheȱemployerȱhasȱaȱdirectȱobligationȱtoȱpayȱbenefitsȱdoȱnotȱseemȱtoȱbeȱconvincingȱ andȱshouldȱbeȱreconsidered.ȱȱAȱgrossȱpresentationȱwouldȱappropriatelyȱreflectȱtheȱeconomicȱsubstanceȱ andȱbeȱconsistentȱwithȱaccountingȱprinciplesȱthatȱareȱappliedȱelsewhere.ȱȱȱ
consolidationsȱproject7,ȱtheȱpurposeȱofȱtheȱstandardȱwasȱidentified.ȱȱTheȱIASBȱisȱconsideringȱtheȱfollowingȱ objective:ȱ
Theȱobjectiveȱisȱforȱtheȱentityȱreportingȱtoȱpresentȱinformationȱaboutȱtheȱassetsȱandȱliabilities,ȱandȱtheȱ activitiesȱrelatedȱtoȱthoseȱassetsȱandȱliabilities,ȱforȱwhichȱitȱholdsȱsufficientȱrightsȱtoȱbeȱableȱtoȱconsumeȱorȱ settleȱasȱifȱtheyȱwereȱlegallyȱtheirs.ȱ
3.4ȱ ThisȱobjectiveȱisȱnotȱdissimilarȱtoȱtheȱobjectiveȱsetȱoutȱinȱtheȱUK’sȱFRSȱ2ȱ‘Subsidiaryȱ Undertakings’,ȱwhichȱstates:ȱ
TheȱobjectiveȱofȱthisȱFRSȱisȱtoȱrequireȱparentȱundertakingsȱtoȱprovideȱfinancialȱinformationȱaboutȱtheȱ economicȱactivitiesȱofȱtheirȱgroupsȱbyȱpreparingȱconsolidatedȱfinancialȱstatements.ȱȱTheseȱstatementsȱareȱ intendedȱtoȱpresentȱfinancialȱinformationȱaboutȱaȱparentȱundertakingȱandȱitsȱsubsidiaryȱundertakingsȱasȱaȱ singleȱeconomicȱentityȱtoȱshowȱtheȱeconomicȱresourcesȱcontrolledȱbyȱtheȱgroup,ȱtheȱobligationsȱofȱtheȱgroupȱ andȱtheȱresultsȱtheȱgroupȱachievesȱwithȱitsȱresources.ȱ
3.5ȱ Theȱaboveȱobjectiveȱsuggestsȱthatȱwhereȱaȱparentȱentityȱhasȱsufficientȱrightsȱtoȱbeȱableȱtoȱconsumeȱ orȱdealȱwithȱtheȱassetsȱandȱliabilitiesȱofȱanȱinvestmentȱasȱifȱtheyȱwereȱitsȱownȱthenȱmoreȱmeaningfulȱ informationȱisȱprovidedȱasȱifȱtheȱresultsȱofȱtheȱinvestorȱandȱitsȱinvestmentsȱareȱpresentedȱasȱaȱsingleȱ economicȱentity.ȱȱThatȱis,ȱconsolidatedȱfinancialȱstatementsȱcombineȱtheȱassetsȱandȱliabilitiesȱofȱaȱparentȱ andȱitsȱinvestmentsȱtoȱpresentȱinformationȱaboutȱaȱsingleȱeconomicȱentity.ȱȱȱ
3.6ȱ Ifȱitȱisȱacceptedȱthatȱtheȱobjectiveȱofȱconsolidatedȱfinancialȱstatementsȱisȱtoȱprovideȱmoreȱ meaningfulȱinformationȱthenȱitȱisȱnecessaryȱtoȱunderstandȱwhyȱexistingȱfinancialȱreportingȱstandardsȱ effectivelyȱprovideȱanȱexemptionȱfromȱtheȱconsolidationȱofȱpensionȱplansȱ(whereȱtheȱplanȱisȱ
consideredȱtoȱbeȱpartȱofȱtheȱsingleȱeconomicȱentity).ȱȱȱ Informationȱprovidedȱfromȱconsolidatedȱfinancialȱstatementsȱ
3.7ȱ Inȱdeterminingȱwhyȱpensionȱplansȱareȱeffectivelyȱexemptȱfromȱtheȱrequirementsȱofȱconsolidationȱ itȱisȱnecessaryȱtoȱconsiderȱwhetherȱthereȱisȱaȱparticularȱreasonȱforȱtheȱexemption.ȱȱOneȱreasonȱmayȱbeȱthatȱ consolidationȱofȱpensionȱplansȱdoesȱnotȱprovideȱmeaningfulȱinformation.ȱȱȱ
3.8ȱ Theȱquestionȱofȱwhetherȱfinancialȱstatementsȱshouldȱconsolidateȱpensionȱplansȱisȱnotȱdiscussedȱinȱ eitherȱIASȱ19ȱ‘EmployeeȱBenefits’ȱorȱSFASȱ87ȱ‘Employers’ȱAccountingȱforȱPensions’.ȱȱTheȱconsolidationȱofȱ pensionȱplansȱwasȱhoweverȱconsideredȱinȱaȱdiscussionȱpaperȱ‘PensionȱCostsȱinȱtheȱEmployer’sȱFinancialȱ Statements’ȱissuedȱbyȱtheȱASBȱinȱ1995.ȱȱThisȱpaperȱdiscussedȱtheȱpresentationȱofȱaȱpensionȱplanȱasȱaȱquasiȬ subsidiaryȱ(specialȱpurposeȱentity)ȱandȱaccountingȱseparatelyȱforȱassetsȱandȱliabilities.ȱȱTheȱASB,ȱatȱthatȱ time,ȱdidȱnotȱconsiderȱthatȱconsolidationȱofȱpensionȱplansȱinȱtheȱaccountsȱofȱtheȱemployerȱwouldȱprovideȱ
7 In June 2003 the IASB decided to undertake a project on consolidation based on a definition of control.
moreȱrelevantȱinformationȱthanȱ‘net’ȱpresentation.ȱȱȱȱThisȱdecisionȱwas,ȱinȱpart,ȱrelatedȱtoȱtheȱUKȱpositionȱ whereȱpensionȱplanȱfinancialȱstatementsȱareȱessentiallyȱaȱstatementȱofȱassetsȱandȱaccruedȱexpensesȱandȱsoȱ consolidatingȱtheȱfinancialȱstatementsȱofȱtheȱplanȱwouldȱnotȱbringȱaȱliabilityȱforȱaccruedȱpensionȱontoȱtheȱ balanceȱsheetȱofȱtheȱemployingȱentity.ȱȱTheȱASBȱthereforeȱconsideredȱmoreȱrelevantȱinformationȱwasȱ providedȱbyȱincorporatingȱtheȱnetȱassetȱorȱliabilityȱinȱtheȱemployer’sȱfinancialȱstatementsȱwithȱ supplementaryȱdisclosuresȱtoȱtheȱcomponentsȱofȱthisȱnetȱamount.ȱȱȱ
3.9ȱ TheȱASBȱalsoȱconsideredȱaccountingȱforȱtheȱseparateȱassetsȱandȱliabilitiesȱofȱtheȱpensionȱplanȱinȱ theȱemployer’sȱfinancialȱstatements.ȱȱItȱdidȱnotȱconsiderȱsuchȱinformationȱwouldȱprovideȱusefulȱ
information,ȱbutȱnotedȱthatȱtheȱpensionȱassetsȱandȱliabilitiesȱofȱsomeȱschemesȱwouldȱovershadow,ȱorȱevenȱ completelyȱswamp,ȱmostȱamountsȱalreadyȱreportedȱinȱtheȱbalanceȱsheet.ȱȱȱ
3.10ȱ Thisȱviewȱwasȱunchangedȱinȱtheȱfinalȱstandard,ȱFRSȱȱ17ȱ‘RetirementȱBenefits’:whichȱwasȱissuedȱinȱ Novemberȱ2000.ȱȱTheȱfollowingȱisȱanȱextractȱfromȱtheȱ‘DevelopmentȱofȱtheȱStandard’:ȱȱ
Pensionȱschemesȱwillȱnotȱusuallyȱbeȱsubsidiaryȱ(orȱquasiȬsubsidiary)ȱundertakingsȱofȱtheȱemployerȱ becauseȱdefinedȱbenefitȱschemesȱareȱcontrolledȱbyȱtheȱtrustees,ȱnotȱtheȱemployer.ȱȱItȱisȱnot,ȱtherefore,ȱ appropriateȱtoȱconsolidateȱtheȱschemeȱintoȱtheȱemployer’sȱfinancialȱstatements.ȱAȱpensionȱschemeȱcanȱ giveȱriseȱtoȱassetsȱandȱliabilitiesȱofȱtheȱemployerȱbutȱtheseȱareȱnotȱtheȱgrossȱamountsȱofȱtheȱpensionȱ schemeȱassetsȱandȱliabilitiesȱ–ȱtheȱemployerȱdoesȱnotȱcontrolȱtheȱassetsȱnorȱisȱitȱdirectlyȱliableȱforȱtheȱ pensionȱpayments.ȱȱInstead,ȱtheȱemployerȱhasȱaȱpensionȱassetȱorȱliabilityȱtoȱtheȱextentȱthatȱitȱisȱentitledȱtoȱ benefitȱfromȱanyȱsurplusȱorȱhasȱaȱlegalȱorȱconstructiveȱobligationȱtoȱmakeȱgoodȱanyȱdeficit.ȱȱȱ
3.11ȱ Moreȱrecently,ȱhowever,ȱtheȱSECȱinȱitsȱreportȱintoȱoffȬbalanceȱsheetȱarrangements8ȱdiscussedȱ consolidationȱandȱnoted:ȱ
ȱ…ȱmanyȱU.S.ȱcompaniesȱchooseȱtoȱfundȱtheirȱpensionȱarrangementsȱbyȱsettingȱupȱseparateȱentitiesȱforȱ theirȱpensionȱplansȱandȱfundingȱthoseȱplans.ȱAlthoughȱcompaniesȱgenerallyȱhaveȱalmostȱtheȱsameȱrisksȱ andȱrewardsȱandȱmuchȱofȱtheȱsameȱlevelȱofȱcontrolȱoverȱtheȱassetsȱandȱobligationsȱwhetherȱtheyȱareȱinȱaȱ separateȱplanȱorȱnot,ȱtheȱaccountingȱchangesȱcompletelyȱifȱaȱplanȱisȱused.ȱȱ
3.12ȱ ItȱisȱalsoȱnotedȱinȱtheȱSECȱreportȱthat:ȱ
Consolidation—Givenȱtheȱfactȱthatȱtheȱplanȱsponsorȱgenerallyȱcontrolsȱandȱisȱsubjectȱtoȱtheȱvastȱmajorityȱofȱ theȱrisksȱandȱrewardsȱofȱtheȱpensionȱplan,ȱthereȱisȱnotȱanȱobviousȱconceptualȱreasonȱwhyȱtheȱplanȱshouldȱnotȱ beȱconsolidated,ȱespeciallyȱsinceȱotherȱtrustsȱusedȱtoȱfundȱliabilitiesȱtypicallyȱareȱconsolidated.ȱȱInȱaddition,ȱ theȱconsolidationȱexemptionȱresultsȱinȱaȱveryȱdifferentȱfinancialȱstatementȱpresentationȱbasedȱonȱwhetherȱaȱ separateȱentityȱisȱusedȱtoȱmanageȱtheȱretirementȱbenefits.ȱWhileȱseparateȱplansȱareȱcommonȱinȱtheȱU.S.ȱ
8 Report and Recommendations Pursuant to Section 401(c) of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers; issued June 2005
becauseȱofȱemploymentȱandȱtaxȱlaws,ȱlawsȱinȱotherȱjurisdictionsȱvary,ȱagainȱraisingȱtheȱpossibilityȱofȱ differentȱaccountingȱforȱsimilarȱtransactions.ȱ
3.13ȱ TheȱSECȱargumentȱsuggestsȱthatȱtheȱreasonȱwhyȱpensionȱplansȱareȱnotȱincludedȱinȱconsolidatedȱ financialȱstatementsȱshouldȱbeȱreconsidered.ȱȱInȱadditionȱtheȱargumentsȱpreviouslyȱpresentedȱbyȱtheȱASBȱ assumeȱthatȱallȱpensionȱplansȱareȱcontrolledȱbyȱtheȱtrustees;ȱwhilstȱlegislationȱinȱsomeȱjurisdictionsȱ compelsȱpensionȱplanȱtrusteesȱtoȱactȱindependentlyȱfromȱtheȱemployingȱentityȱthisȱviewȱmayȱnotȱbeȱ correctȱinȱall.ȱȱȱ
Doesȱconsolidationȱimproveȱtheȱqualityȱofȱinformation?ȱ
3.14ȱ InȱJulyȱ2006ȱtheȱIASBȱpublishedȱaȱdiscussionȱpaperȱ‘PreliminaryȱViewsȱonȱanȱimprovedȱ
ConceptualȱFrameworkȱforȱFinancialȱReporting’.ȱȱInȱthisȱdiscussionȱpaperȱitȱisȱnotedȱthatȱtheȱobjectiveȱofȱ generalȱpurposeȱfinancialȱstatementsȱisȱtoȱprovideȱinformationȱthatȱisȱusefulȱtoȱpresentȱandȱpotentialȱ investorsȱandȱcreditorsȱandȱothersȱinȱmakingȱinvestment,ȱcreditȱandȱsimilarȱresourceȱallocationȱdecisions.ȱȱ 3.15ȱ Toȱconsiderȱwhetherȱtheȱconsolidationȱofȱpensionȱplansȱwouldȱprovideȱmoreȱusefulȱinformationȱ toȱtheȱusersȱofȱfinancialȱstatementsȱweȱneedȱtoȱconsiderȱtheȱdifferenceȱbetweenȱinformationȱthatȱisȱ currentlyȱpresentedȱregardingȱpensionȱplansȱandȱinformationȱwhichȱmightȱbeȱpresentedȱwereȱaȱpensionȱ planȱconsolidatedȱasȱpartȱofȱgroupȱfinancialȱstatements.ȱȱ
3.16ȱ Atȱpresentȱfinancialȱreportingȱstandardsȱpermitȱaȱsingleȱamountȱtoȱbeȱrecognisedȱinȱtheȱbalanceȱ sheetȱofȱtheȱreportingȱentityȱforȱpensionȱplans.ȱȱTheȱliabilitiesȱofȱtheȱplanȱareȱoffsetȱagainstȱtheȱassetsȱheldȱ toȱfundȱpensionȱliabilitiesȱ(netȱpresentation).ȱȱTheȱcostsȱofȱprovidingȱpensionȱbenefitsȱareȱreportedȱinȱ profitȱandȱlossȱeitherȱasȱaȱsingleȱlineȱitemȱorȱwithinȱindividualȱlineȱitemsȱtoȱwhichȱtheyȱrelate.ȱ
3.17ȱ Underȱexistingȱfinancialȱreportingȱstandardsȱtheȱassetsȱofȱtheȱpensionȱplanȱareȱdeductedȱfromȱtheȱ liabilitiesȱandȱmoreȱdetailedȱdisclosuresȱregardingȱtheȱassetsȱandȱliabilitiesȱofȱtheȱplanȱareȱprovidedȱinȱtheȱ notesȱtoȱtheȱfinancialȱstatements.ȱȱAȱuserȱcanȱclearlyȱidentifyȱassetsȱthatȱareȱsegregatedȱtoȱfundȱpensionȱ benefits.ȱȱWereȱtheȱfinancialȱstatementsȱofȱtheȱpensionȱplanȱconsolidatedȱasȱpartȱofȱtheȱgroupȱfinancialȱ statementsȱthenȱtheȱassetsȱofȱtheȱplanȱ(normallyȱfinancialȱassets)ȱwouldȱbeȱcombinedȱwithȱotherȱfinancialȱ assetsȱofȱtheȱemployingȱentity.ȱȱȱ
3.18ȱ Ifȱpensionȱplansȱwereȱconsolidatedȱthenȱtheȱfinancialȱstatementsȱofȱtheȱemployingȱentityȱwouldȱ combineȱtheȱassetsȱandȱliabilitiesȱofȱtheȱpensionȱplanȱwithȱthoseȱofȱitsȱown.ȱȱTheȱmostȱnoticeableȱchangeȱ thisȱwouldȱbringȱwouldȱbeȱtoȱtheȱbalanceȱsheetȱwhereȱtheȱassetsȱandȱliabilitiesȱofȱtheȱplanȱwouldȱbeȱ presentedȱwithinȱtheȱbalanceȱsheetȱcategoryȱtoȱwhichȱtheyȱrelateȱ–ȱthatȱisȱtheyȱwouldȱbeȱpresentedȱgrossȱ (grossȱpresentation).ȱȱȱ
3.19ȱ Weȱneedȱtoȱconsiderȱwhetherȱgrossȱpresentationȱimprovesȱtheȱqualityȱofȱinformationȱforȱtheȱuserȱ ofȱfinancialȱstatements.ȱȱOneȱviewȱisȱthatȱcombiningȱtheȱassetsȱheldȱtoȱfundȱpensionȱbenefitsȱwithȱotherȱ financialȱassetsȱreducesȱtheȱinformationȱaȱuserȱhasȱavailableȱasȱitȱisȱnoȱlongerȱpossibleȱforȱaȱuserȱtoȱ
distinguishȱassetsȱheldȱtoȱfundȱpensionȱbenefitsȱfromȱotherȱassets.ȱȱȱInȱtheseȱcircumstancesȱitȱwillȱbeȱ necessaryȱtoȱconsiderȱwhetherȱadditionalȱdisclosuresȱareȱrequiredȱconcerningȱassetsȱheldȱtoȱfundȱpensionȱ benefitsȱorȱwhetherȱassetsȱheldȱtoȱfundȱpensionȱbenefitsȱshouldȱbeȱidentifiedȱasȱaȱseparateȱclassȱofȱassets.ȱȱ 3.20ȱ Anȱalternativeȱview,ȱhowever,ȱisȱthatȱifȱtheȱreportingȱentityȱhasȱsimilarȱrightsȱoverȱtheȱassetsȱheldȱ toȱfundȱpensionȱbenefitsȱtoȱotherȱassetsȱthereȱisȱlittle,ȱifȱany,ȱjustificationȱthatȱtheȱassetsȱheldȱtoȱfundȱ pensionȱbenefitsȱwarrantȱaȱdifferentȱpresentationȱtoȱassetsȱthatȱareȱheldȱforȱotherȱpurposes.ȱȱThatȱis,ȱgrossȱ presentationȱpresentsȱtheȱtotalȱeconomicȱresourcesȱavailableȱtoȱtheȱentity.ȱ
3.21ȱ Thusȱaȱcaseȱcanȱbeȱmadeȱthatȱmoreȱusefulȱinformationȱisȱprovided,ȱwhereȱtheȱemployingȱentityȱ hasȱcontrolȱofȱtheȱpensionȱplan,ȱifȱtheȱassetsȱandȱliabilitiesȱofȱtheȱplanȱareȱpresentedȱ‘gross’.ȱȱThatȱisȱ‘gross’ȱ presentationȱprovidesȱgreaterȱinformationȱaboutȱtheȱresourcesȱanȱentityȱcontrols.ȱȱHowever,ȱ
supplementaryȱdisclosuresȱmayȱbeȱnecessaryȱofȱassetsȱheldȱtoȱfundȱpensionȱbenefitsȱandȱtheȱpensionȱ liability.ȱȱȱȱ
3.22ȱ Theȱconsolidationȱofȱpensionȱplansȱneedsȱtoȱbeȱconsideredȱinȱtheȱcontextȱofȱusefulȱinformationȱ beingȱprovidedȱtoȱusersȱofȱfinancialȱstatements.ȱȱWhereȱaȱpensionȱplanȱisȱpartȱofȱtheȱsingleȱeconomicȱ entityȱ(theȱgroup)ȱthenȱtheȱaboveȱanalysisȱsuggestsȱthatȱtheȱusefulnessȱofȱinformationȱisȱimprovedȱifȱtheȱ pensionȱplanȱisȱconsolidatedȱ(whereȱtheȱplanȱformsȱpartȱofȱtheȱsingleȱeconomicȱentity).ȱȱȱ
TheȱIASB’sȱconsolidationȱprojectȱ
3.23ȱ Inȱdecidingȱwhichȱentitiesȱformȱtheȱsingleȱeconomicȱentityȱ(theȱgroup)ȱaȱunifyingȱfactorȱisȱ
required.ȱȱIASȱ27ȱstatesȱthatȱconsolidatedȱfinancialȱstatementsȱshallȱincludeȱallȱsubsidiariesȱofȱtheȱparent.ȱȱ Aȱsubsidiaryȱisȱdefinedȱasȱanȱentity,ȱincludingȱanȱunincorporatedȱentityȱsuchȱasȱaȱpartnershipȱthatȱisȱ controlledȱbyȱanotherȱentityȱ(knownȱasȱaȱparent).ȱȱ
3.24ȱ ItȱisȱnotedȱinȱIASȱ27ȱthatȱcontrolȱexists,ȱinȱadditionȱtoȱvotingȱinterests,ȱwhenȱtheȱparentȱownsȱhalfȱ orȱlessȱofȱtheȱvotingȱpowersȱofȱanȱentityȱwhenȱthereȱis:ȱ
(a) powerȱoverȱmoreȱthanȱhalfȱofȱtheȱvotingȱrightsȱbyȱvirtueȱofȱanȱagreementȱwithȱotherȱinvestors;ȱ (b) powerȱtoȱgovernȱtheȱfinancialȱandȱoperatingȱpoliciesȱofȱtheȱentityȱunderȱaȱstatueȱorȱanȱagreement;ȱ (c) powerȱtoȱappointȱorȱremoveȱtheȱmajorityȱofȱtheȱmembersȱofȱtheȱboardȱofȱdirectorsȱorȱequivalentȱ
governingȱbodyȱandȱcontrolȱofȱtheȱentityȱisȱbyȱthatȱboardȱorȱbody;ȱorȱ
(d) powerȱ toȱ castȱ theȱmajorityȱ ofȱvotesȱatȱmeetingsȱ ofȱtheȱboardȱofȱ directors or equivalent governing body and control of the entity is by that board or body.
3.25ȱ IASȱ27ȱthereforeȱusesȱcontrolȱasȱaȱunifyingȱfactor.ȱȱControlȱisȱdeterminedȱbyȱtheȱpowerȱtoȱgovernȱ theȱfinancialȱandȱoperatingȱpoliciesȱofȱanotherȱentityȱsoȱasȱtoȱobtainȱbenefitsȱfromȱitsȱactivities.ȱȱThisȱ
definitionȱofȱcontrolȱhasȱtwoȱelements:ȱpowerȱ(abilityȱtoȱgovernȱtheȱfinancialȱandȱoperatingȱpoliciesȱofȱ anotherȱentity)ȱandȱbenefitȱ(toȱobtainȱbenefitȱfromȱitsȱactivities).ȱȱ
3.26ȱ TheȱIASBȱhas,ȱhowever,ȱbeenȱreconsideringȱIASȱ27ȱasȱpartȱofȱitsȱconsolidationsȱproject.ȱȱTheȱ projectȱincludesȱconsideringȱwhetherȱeffectiveȱcontrolȱratherȱthanȱlegalȱcontrolȱisȱaȱsufficientȱbasisȱforȱ consolidation.ȱȱThisȱpaperȱutilisesȱtheȱpreliminaryȱfindingsȱandȱtentativeȱdecisionsȱreachedȱbyȱtheȱIASBȱinȱ itsȱconsolidationȱprojectȱasȱatȱ30ȱNovemberȱ2007.ȱ
AnalysisȱofȱIASBȱconsolidationȱprojectȱ–ȱtentativeȱdecisionsȱȱ
3.27ȱ TheȱobjectiveȱofȱtheȱIASB’sȱconsolidationsȱprojectȱisȱtoȱidentifyȱtheȱcriteriaȱforȱwhenȱanȱinvestorȱisȱ requiredȱtoȱincludeȱtheȱassets,ȱliabilitiesȱandȱactivitiesȱofȱitsȱinvestmentsȱinȱitsȱconsolidatedȱfinancialȱ statements.ȱȱInȱJulyȱ2006ȱtheȱIASBȱreconsideredȱitsȱearlierȱdefinitionȱofȱcontrolȱandȱtentativelyȱagreedȱthatȱ aȱparentȱentityȱhasȱaȱcontrollingȱinterestȱinȱanotherȱentity:ȱ
…ȱwhenȱitȱhasȱexclusiveȱrightsȱoverȱthatȱentity’sȱassetsȱandȱliabilitiesȱwhichȱgiveȱitȱaccessȱtoȱtheȱbenefitȱofȱ thoseȱassetsȱandȱliabilitiesȱandȱtheȱabilityȱtoȱincrease,ȱmaintainȱorȱprotectȱtheȱamountȱofȱthoseȱbenefits.ȱȱ Therefore,ȱtoȱcontrolȱanȱentityȱtheȱpotentialȱcontrollerȱmustȱsatisfyȱthreeȱtests:ȱ
(a)ȱ itȱmustȱhaveȱtheȱabilityȱtoȱdirectȱtheȱstrategicȱplanningȱandȱoperatingȱpoliciesȱofȱtheȱentityȱ(theȱ
‘PowerȱCriterion’;ȱ
(b)ȱ itȱmustȱhaveȱtheȱabilityȱtoȱaccessȱtheȱbenefitsȱflowingȱfromȱtheȱentityȱ(theȱ‘BenefitsȱCriterion’);ȱandȱ (c)ȱ itȱmustȱbeȱableȱtoȱuseȱitsȱPowerȱsoȱasȱtoȱincrease,ȱmaintainȱorȱprotectȱtheȱamountȱofȱthoseȱbenefits.ȱ
3.28ȱ TheȱIASBȱisȱconsideringȱthisȱapproachȱ(ratherȱthanȱanȱearlierȱapproachȱthatȱfocusedȱonȱcontrolȱ beingȱtheȱabilityȱofȱtheȱreportingȱentityȱtoȱdirectȱtheȱstrategicȱfinancingȱandȱoperatingȱpoliciesȱofȱanȱentityȱ soȱasȱtoȱaccessȱtheȱbenefitsȱflowingȱfromȱtheȱentityȱandȱincreaseȱmaintainȱorȱprotectȱtheȱamountȱofȱthoseȱ benefits)ȱasȱitȱisȱenvisagedȱthatȱthisȱchangeȱinȱfocusȱwillȱassistȱinȱtheȱconsolidationȱissuesȱthatȱsurroundȱ specialȱpurposeȱentities.ȱȱInȱadditionȱitȱisȱalsoȱconsideredȱthatȱtheȱchangeȱisȱappropriateȱbecauseȱuseȱofȱ assetsȱandȱliabilitiesȱofȱtheȱentityȱis,ȱultimately,ȱwhatȱpowerȱoverȱtheȱstrategicȱfinancingȱandȱoperatingȱ policiesȱisȱintendedȱtoȱcapture.ȱ
3.29ȱ Theȱcriteriaȱforȱconsolidation,ȱusingȱtheȱIASB’sȱtentativeȱdecision,ȱseemsȱlikelyȱtoȱfocusȱonȱ whetherȱanȱentityȱhasȱrightsȱandȱresponsibilitiesȱoverȱanotherȱentity’sȱassetsȱandȱliabilitiesȱwhichȱgiveȱitȱ accessȱtoȱtheȱbenefitsȱofȱthoseȱassetsȱandȱliabilitiesȱandȱtheȱabilityȱtoȱincrease,ȱmaintainȱorȱprotectȱtheȱ amountȱofȱthoseȱbenefitsȱasȱifȱtheyȱwereȱitsȱown.ȱȱ
3.30ȱ AsȱpartȱofȱtheȱconsolidationȱprojectȱtheȱIASBȱhasȱidentifiedȱthatȱitsȱproposalsȱbuildȱonȱtwoȱveryȱ importantȱpresumptions,ȱwhichȱhaveȱtheirȱrootsȱinȱbasicȱfinanceȱtheoryȱandȱeconomicȱpropertyȱrightsȱ theory,ȱtheseȱare:ȱ
x theȱrelationshipȱbetweenȱriskȱandȱrewards;ȱandȱ x theȱrelationshipȱbetweenȱrightsȱandȱbenefits.
3.31ȱ Theȱfoundationsȱofȱtheȱprojectȱpresumeȱthatȱanȱentityȱthatȱabsorbsȱtheȱvariabilityȱofȱanȱassetȱisȱtheȱ partyȱthatȱbenefitsȱfromȱtheȱasset.ȱȱTheȱtermȱvariabilityȱisȱusedȱinȱrelationȱtoȱwhoȱbearsȱtheȱrisksȱorȱ
receivesȱtheȱrewards.ȱȱȱItȱfollowsȱthatȱtheȱmoreȱvariabilityȱaȱpartyȱisȱexpectedȱtoȱabsorbȱtheȱmoreȱcontrolȱ theȱpartyȱwillȱwantȱtoȱhaveȱoverȱtheȱassetsȱcausingȱtheȱvariability.ȱȱȱ
3.32ȱ Toȱdetermineȱwhetherȱanȱentityȱformsȱpartȱofȱtheȱsingleȱentityȱ(theȱgroup)ȱtheȱIASB’sȱproposalsȱ suggestȱidentifyingȱwhatȱrightsȱeachȱpartyȱhasȱ(andȱtheȱvariabilityȱtheyȱareȱabsorbing)ȱinȱorderȱtoȱ determineȱwhoȱcontrolsȱtheȱentity.ȱ
3.33ȱ Underȱtheȱtraditionalȱcontrolȱmodel,ȱtheȱbenefitsȱrealisedȱbyȱanȱinvestorȱareȱgenerallyȱ proportionateȱtoȱtheȱpowerȱheld.ȱȱInȱtheseȱinstancesȱitȱisȱnotȱnormallyȱdifficultȱtoȱdetermineȱwhoȱhasȱ control;ȱhoweverȱthisȱmayȱnotȱalwaysȱholdȱtrue.ȱȱThatȱisȱtoȱsayȱtheȱentityȱholdingȱtheȱmajorityȱofȱtheȱ votingȱrightsȱinȱsomeȱarrangementsȱmightȱnotȱcontrolȱtheȱentityȱparticularlyȱifȱtheȱoperatingȱandȱfinancialȱ policiesȱhaveȱbeenȱpredetermined.ȱTheseȱarrangementsȱareȱsometimesȱreferredȱtoȱasȱSpecialȱPurposeȱ Entitiesȱ(SPEȱorȱquasiȬsubsidiaries).ȱȱCurrentȱrequirementsȱforȱSPEsȱinȱIFRSȱandȱUSȱGAAPȱareȱreviewedȱ inȱanȱAppendixȱtoȱthisȱChapter.ȱȱȱ
3.34ȱ InȱviewȱofȱtheȱfactȱthatȱtheȱIASB’sȱconsolidationȱprojectȱaimsȱtoȱreplaceȱIASȱ27ȱandȱSICȱ12ȱitȱseemsȱ sensibleȱtoȱapplyȱtheȱIASB’sȱlatestȱthinkingȱfromȱitsȱconsolidationȱprojectȱasȱtoȱwhetherȱpensionȱplansȱ formȱpartȱofȱtheȱconsolidatedȱgroup.ȱȱTheȱIASB’sȱworkingȱdefinition9ȱofȱwhenȱaȱparentȱentityȱcontrolsȱ anotherȱis:ȱ
Anȱentityȱhasȱaȱcontrollingȱinterestȱinȱanotherȱentityȱwhenȱitȱhasȱtheȱexclusiveȱrightsȱoverȱthatȱentity’sȱ assetsȱandȱliabilitiesȱwhichȱgiveȱitȱaccessȱtoȱtheȱbenefitsȱofȱthoseȱassetsȱandȱliabilitiesȱandȱtheȱabilityȱtoȱ increase,ȱmaintainȱandȱprotectȱtheȱamountȱofȱthoseȱbenefitsȱ
3.35ȱ Toȱestablishȱwhetherȱanȱentityȱcontrolsȱaȱpensionȱplanȱitȱisȱnecessaryȱtoȱconsiderȱhowȱtheȱassetsȱ andȱliabilitiesȱofȱtheȱplanȱareȱcontrolledȱandȱwhetherȱtheseȱcontrolȱmechanismsȱprovideȱevidenceȱ(thatȱisȱ indicatorsȱofȱcontrol)ȱaboutȱwhoȱhasȱcontrolȱofȱtheȱpensionȱplan.ȱȱȱ
Theȱroleȱofȱpensionȱplansȱ
3.36ȱ Inȱdeterminingȱwhetherȱaȱpensionȱplanȱmeetsȱtheȱcriteriaȱforȱconsolidationȱtheȱnatureȱandȱroleȱofȱ theȱpensionȱplanȱneedsȱtoȱbeȱexamined.ȱȱȱ
9 see paragraph 3.29.
3.37ȱ Theȱfollowingȱsectionȱisȱbased,ȱprimarily,ȱonȱtheȱcommonȱpositionȱwhereȱpensionȱplansȱareȱ establishedȱasȱtrusts.ȱȱTheȱtwoȱmainȱreasonsȱforȱpensionȱplansȱbeingȱestablishedȱasȱtrustsȱare:ȱ
x itȱseparatesȱtheȱpensionȱplan’sȱassetsȱfromȱthoseȱofȱtheȱemployer.ȱȱThisȱisȱimportantȱasȱitȱprovidesȱ securityȱtoȱtheȱemployersȱpensionȱpromise;ȱandȱ
x itȱisȱoftenȱtaxȱefficientȱtoȱestablishȱaȱpensionȱtrust.ȱ
3.38ȱ Trustȱlawȱhasȱdevelopedȱoverȱmanyȱyears.ȱȱTheȱbasisȱofȱtrustȱlawȱisȱthatȱoneȱgroupȱofȱpeopleȱ(theȱ trustees)ȱholdȱassetsȱforȱtheȱbenefitȱofȱanotherȱgroupȱofȱpeopleȱ(theȱbeneficiaries).ȱȱ
3.39ȱ Plansȱareȱgenerallyȱgovernedȱbyȱaȱtrustȱdeedȱand/orȱinȱadditionȱ(orȱcombinedȱwithȱtheȱtrustȱdeed)ȱ areȱtheȱschemeȱrules.ȱȱTraditionallyȱtheȱresponsibilitiesȱofȱtrusteesȱareȱdividedȱintoȱthreeȱcategories;ȱduties,ȱ powersȱandȱdiscretionaryȱpowers.ȱȱȱȱDutiesȱareȱtasksȱwhichȱtheȱtrusteesȱmustȱensureȱareȱcarriedȱout.ȱȱ Powersȱareȱrightsȱwhichȱtheȱtrustȱdeedȱandȱrulesȱgiveȱtoȱtrustees.ȱȱDiscretionaryȱpowersȱareȱpowersȱgivenȱ byȱtheȱtrustȱdeedȱtoȱtheȱtrusteesȱwhichȱpermitȱchoice,ȱwithȱtheȱbestȱinterestȱofȱtheȱbeneficiariesȱinȱmind.ȱ 3.40ȱ Inȱundertakingȱhis/herȱresponsibilitiesȱaȱtrusteeȱmustȱactȱinȱtheȱbestȱinterestsȱofȱtheȱtrustȱ
beneficiaries.ȱȱAȱbeneficiaryȱisȱanyoneȱwhoȱisȱentitledȱto,ȱorȱwhoȱmightȱreceive,ȱbenefitȱfromȱtheȱtrustȱnowȱ orȱinȱtheȱfuture.ȱȱȱ
3.41ȱ Inȱexecutingȱhisȱdutiesȱaȱtrusteeȱmustȱactȱwithinȱtheȱframeworkȱofȱtheȱlaw.ȱȱThereȱareȱseveralȱ typesȱofȱlawȱthatȱaffectȱoccupationalȱpensionȱschemes,ȱincluding:ȱ
x theȱgeneralȱlawȱofȱtrusts;ȱandȱȱ
x specificȱlawȱapplyingȱtoȱpensionȱschemes.ȱ
3.42ȱ Theȱtrusteesȱmustȱactȱwithinȱtheirȱpowersȱtoȱprotectȱschemeȱbeneficiaries.ȱȱPowersȱtoȱthisȱendȱareȱ likelyȱtoȱinclude:ȱ
x acceptingȱcontributions;ȱ
x decidingȱonȱtheȱinvestmentȱstrategy;ȱandȱ
x agreeingȱcontributionȱandȱfundingȱprinciplesȱwithȱtheȱsponsoringȱemployer.ȱ
3.43ȱ Thereȱisȱaȱnaturalȱtensionȱbetweenȱtheȱtrusteesȱofȱtheȱpensionȱplanȱandȱtheȱemployingȱentity.ȱȱInȱ exercisingȱpowersȱtoȱprotectȱtheȱpositionȱofȱbeneficiaries,ȱtrusteesȱneedȱtoȱtakeȱintoȱconsiderationȱtheȱ positionȱofȱtheȱemployingȱentity.ȱȱThisȱwillȱoftenȱmeanȱbalancingȱtheȱemployer’sȱpositionȱwithȱthatȱofȱtheȱ plan’sȱbeneficiaries.ȱȱThisȱisȱaȱparticularȱissueȱwhenȱagreeingȱfundingȱlevelsȱwithȱtheȱemployingȱentity,ȱitȱ isȱimportantȱtoȱtheȱbeneficiariesȱthatȱtheȱemployingȱentityȱremainsȱfinanciallyȱhealthy.ȱȱȱ
3.44ȱ Theȱrelationshipȱbetweenȱtheȱemployingȱentityȱandȱtheȱtrustees,ȱparticularlyȱtheȱpowerȱofȱtrustees,ȱ willȱbeȱfundamentalȱinȱestablishingȱwhetherȱaȱreportingȱentityȱcontrolsȱtheȱpensionȱplan.ȱ
3.45ȱ Ourȱunderstandingȱisȱthat,ȱinternationally,ȱinȱmostȱcountriesȱtheȱboardsȱofȱpensionȱplansȱareȱ comprisedȱofȱrepresentativesȱofȱbothȱemployersȱandȱmembers.ȱȱFurthermore,ȱinȱmostȱcountriesȱmanagersȱ ofȱpensionȱplansȱareȱrequiredȱtoȱhaveȱregardȱtoȱtheȱmembers’ȱinterests,ȱsometimesȱjointlyȱwithȱemployers’ȱ interests.ȱȱȱ
Applicationȱofȱtheȱnotionȱofȱ‘control’ȱtoȱtheȱconsolidationȱofȱpensionȱplansȱȱ
3.46ȱ Theȱareasȱofȱaȱpensionȱplanȱthatȱareȱsignificantȱandȱmightȱbeȱconsideredȱtoȱprovideȱevidenceȱasȱtoȱ whereȱcontrolȱvestsȱareȱthoughtȱtoȱinclude:ȱ
constitutionȱofȱpensionȱplanȱboardȱ(includingȱtheȱappointment,ȱdutiesȱandȱresponsibilitiesȱofȱtheȱ managers/(trustees));ȱ
(i) whoȱhasȱaccessȱtoȱtheȱpensionȱplan;ȱ
(ii) whoȱbenefitsȱfromȱtheȱplan;ȱandȱ
(iii) whoȱdeterminesȱtheȱinvestmentȱandȱfundingȱpolicy.ȱ (i)ȱ Constitutionȱofȱtheȱpensionȱplanȱboardȱ
3.47ȱ Theȱroleȱofȱtheȱtrusteesȱisȱdiscussedȱaboveȱunderȱtheȱtitleȱ‘theȱroleȱofȱpensionȱplans’.ȱȱThisȱ identifiedȱthatȱtrusteesȱareȱrequiredȱtoȱactȱinȱtheȱbestȱinterestȱofȱtheȱplan’sȱbeneficiaries.ȱȱInȱactingȱinȱtheȱ beneficiaries’ȱinterestȱtheyȱmustȱbalanceȱtheȱbeneficiaries’ȱpositionȱwithȱthatȱofȱtheȱemployingȱentity.ȱȱTheȱ evidenceȱcollatedȱduringȱtheȱdevelopmentȱofȱthisȱdiscussionȱpaperȱsuggestsȱmanagers/(trustees)ȱinȱmanyȱ jurisdictionsȱactȱinȱtheȱinterestȱofȱbothȱtheȱplanȱbeneficiariesȱandȱtheȱemployer.ȱȱ
3.48ȱ Someȱmayȱthereforeȱargueȱthatȱanȱemployingȱentityȱcanȱobtainȱcontrolȱofȱtheȱpensionȱplanȱbyȱ appointingȱmanagers/(trustees)ȱtoȱtheȱpensionȱplanȱboardȱthatȱempathiseȱwithȱitsȱpositionȱandȱasȱaȱresultȱ canȱaffectȱtheȱdecisionsȱmadeȱbyȱtheȱpensionȱplanȱmanagers/(trustees).ȱȱTheȱappointmentȱofȱ
managers/(trustees)ȱandȱconstitutionȱofȱtheȱtrusteeȱboardȱis,ȱhowever,ȱregulatedȱthroughȱtheȱtrustȱdeedȱ andȱschemeȱrulesȱandȱinȱadditionȱsupplementedȱbyȱlaw.ȱȱȱ
3.49ȱ Appointmentȱalone,ȱhowever,ȱmayȱnotȱdetermineȱcontrolȱofȱtheȱplan,ȱforȱexample,ȱonceȱtheȱ trusteesȱofȱaȱpensionȱplanȱareȱappointedȱinȱtheȱUK,ȱtheyȱareȱrequiredȱtoȱactȱforȱtheȱbenefitȱofȱtheȱplan’sȱ beneficiariesȱwhoȱareȱprincipallyȱpresentȱandȱpastȱemployeesȱandȱfamilies/dependentsȱratherȱthanȱtheȱ employingȱentity.ȱȱInȱtheseȱcircumstancesȱevenȱifȱanȱemployerȱwereȱableȱtoȱselectȱandȱappointȱ
managers/(trustees)ȱthatȱempathisedȱwithȱitsȱposition,ȱonceȱappointedȱtheȱmanager/(trustee)ȱwillȱnotȱbeȱ ableȱtoȱactȱotherȱthanȱinȱtheȱinterestsȱofȱtheȱplan’sȱbeneficiaries.ȱȱInȱaddition,ȱonceȱappointed,ȱemployerȱ
nominatedȱtrusteesȱmustȱinȱtheȱcaseȱofȱanyȱconflictȱofȱinterestȱcarryȱoutȱtheirȱdutiesȱasȱtrusteesȱinȱ
preferenceȱtoȱtheȱinterestsȱofȱtheȱemployingȱentity.ȱȱAȱtrusteeȱnotȱactingȱinȱtheȱinterestȱofȱtheȱbeneficiariesȱ risksȱbeingȱheldȱinȱbreachȱofȱtrust.ȱȱ
3.50ȱ Theȱroleȱofȱmanagers/ȱ(trustees)ȱisȱinfluencedȱbyȱtheȱpowersȱandȱdutiesȱvestedȱinȱthemȱinȱ
accordanceȱwithȱtheȱtrustȱdeedȱandȱbyȱRegulation.ȱȱTheȱUKȱPensionȱRegulator,ȱforȱexample,ȱhasȱissuedȱaȱ codeȱofȱpracticeȱforȱUKȱtrusteesȱofȱpensionȱplans.ȱTheȱpurposeȱofȱthisȱcodeȱisȱtoȱprovideȱpracticalȱ
guidelinesȱonȱwhatȱknowledgeȱandȱunderstandingȱisȱrequiredȱbyȱtrusteesȱunderȱtheȱlegislation,ȱandȱtoȱsetȱ outȱtheȱschemeȱdocumentsȱwithȱwhichȱtrusteesȱareȱrequiredȱtoȱbeȱconversantȱwith.ȱȱ
3.51ȱ Inȱviewȱofȱtheȱregulationȱsurroundingȱtheȱroleȱofȱpensionȱplanȱmanagers/(trustees)ȱwhereȱaȱplanȱisȱ establishedȱitȱwillȱbeȱnecessaryȱtoȱdetermineȱifȱcontrolȱofȱtheȱplanȱisȱvestedȱinȱtheȱmanagementȱ(board)ȱofȱ theȱplanȱorȱwhetherȱtheȱemployerȱhasȱcontrolȱofȱtheȱplanȱȬȱthatȱisȱwhetherȱtheȱemployerȱcanȱaffectȱtheȱ decisionsȱreachedȱbyȱmanagers/(trustees)ȱofȱtheȱplan.ȱȱThisȱwillȱrequire,ȱinȱadditionȱtoȱjudgementȱbeingȱ exercised,ȱtheȱregulatoryȱframeworkȱinȱwhichȱtheȱplanȱoperatesȱtoȱbeȱconsidered.ȱȱItȱmightȱbeȱconcludedȱ thatȱlocalȱlawsȱand/orȱregulationȱstipulateȱhowȱmanagers/(trustees)ȱareȱappointedȱandȱprohibitȱtrusteesȱ fromȱactingȱotherȱthanȱforȱtheȱbenefitȱofȱschemeȱbeneficiaries.ȱȱInȱapplyingȱjudgementȱitȱwillȱbeȱnecessaryȱ toȱconsiderȱtheȱsubstanceȱofȱtheȱrelationshipȱbetweenȱtheȱreportingȱentityȱandȱtheȱpensionȱplan.ȱ
3.52ȱ Inȱdeterminingȱwhoȱhasȱcontrolȱofȱtheȱpensionȱplanȱitȱisȱnecessaryȱtoȱestablishȱwhetherȱtheȱ reportingȱentityȱhasȱtheȱdecisionȱmakingȱpowersȱofȱtheȱpensionȱplanȱandȱcanȱdirectȱ
managers/(trustees).ȱȱThisȱwillȱrequireȱconsiderationȱofȱallȱrelevantȱfactors,ȱincludingȱregulatoryȱ influences,ȱandȱbeȱbasedȱonȱtheȱsubstanceȱofȱtheȱrelationshipȱbetweenȱtheȱemployerȱandȱtheȱpensionȱ plan.ȱȱ
(ii)ȱ ȱWhoȱhasȱaccessȱtoȱtheȱpensionȱplanȱ
3.53ȱ Inȱconsideringȱwhetherȱaccessȱtoȱtheȱpensionȱplanȱprovidesȱanȱindicatorȱofȱcontrolȱitȱmightȱbeȱ helpfulȱtoȱconsiderȱtheȱpositionȱofȱtheȱemployerȱandȱofȱtheȱemployee:ȱ
x theȱemployerȱinȱexchangeȱforȱtheȱemployeeȱservices,ȱpermitsȱanȱemployeeȱtoȱparticipateȱinȱaȱ pensionȱplanȱwhichȱheȱsponsors.ȱȱTheȱemployerȱobtainsȱbenefitsȱfromȱtheȱprovisionȱofȱemployeeȱ servicesȱofȱwhichȱpartȱofȱtheȱsettlementȱforȱthoseȱservicesȱinȱdeferredȱasȱaȱfutureȱpensionȱpayment.ȱȱȱ x theȱemployeeȱasȱaȱbeneficiaryȱofȱtheȱplanȱexpectsȱaȱpensionȱpaymentȱforȱemploymentȱservicesȱ
providedȱinȱtheȱpast.ȱȱTheȱamountȱofȱpensionȱhoweverȱdependsȱonȱtermsȱagreedȱbyȱtheȱemployer.ȱȱȱ 3.54ȱ Weȱmightȱalsoȱconsiderȱtheȱroleȱofȱtheȱmanagers/(trustees)ȱofȱaȱpensionȱplan.ȱȱManagers/(trustees)ȱ normallyȱhaveȱonlyȱlimitedȱabilityȱtoȱaffectȱtheȱlevelȱofȱbenefitȱofferedȱtoȱemployeesȱbyȱtheȱemployerȱ–ȱ theirȱroleȱisȱprincipallyȱtoȱsecureȱtheȱpaymentȱtoȱtheȱbeneficiaries.ȱȱArguablyȱtheȱliabilitiesȱofȱtheȱschemeȱ areȱ“handedȱdown”ȱtoȱtheȱpensionȱplanȱbyȱtheȱemployingȱentityȱandȱtheȱmanagers/(trustees)ȱroleȱisȱtoȱ protectȱtheȱpensionȱpromiseȱbyȱsecuringȱfundingȱbyȱcontributionsȱfromȱtheȱemployerȱandȱensuringȱanȱ
effectiveȱinvestmentȱpolicy.ȱȱȱItȱthereforeȱseemsȱunlikelyȱtrusteesȱcanȱaffectȱtheȱliability,ȱalthoughȱtheyȱmayȱ beȱableȱtoȱaffectȱtheȱamountȱrequiredȱbyȱtheȱemployerȱtoȱsettleȱthisȱliabilityȱthroughȱinvestmentȱpolicyȱ decisions.ȱ
3.55ȱ Theȱaboveȱsuggestsȱthatȱmanagers/(trustees)ȱareȱnotȱpartyȱtoȱtheȱofferȱofȱbenefitsȱandȱhaveȱlimitedȱ abilityȱtoȱcontrolȱpensionȱliabilities.ȱȱHowever,ȱtheȱplan’sȱconstitutionȱ(e.g.ȱtrustȱdeed)ȱmayȱprovideȱtheȱ managers/ȱ(trustees)ȱwithȱcertainȱpowersȱtoȱprotectȱbenefitsȱalreadyȱearnedȱand/orȱtoȱprotectȱfutureȱ benefitsȱforȱexistingȱbeneficiariesȱ(i.e.ȱtheȱabilityȱtoȱrestrictȱanȱemployerȱfromȱalteringȱtheȱlevelȱofȱfutureȱ benefits).ȱȱInȱtheseȱcircumstancesȱcertainȱelementsȱofȱcontrol,ȱregardingȱbenefits,ȱhaveȱarguablyȱbeenȱ passedȱtoȱtheȱmanagers/(trustees)ȱofȱtheȱplan.ȱȱ
3.56ȱ Inȱdeterminingȱwhetherȱanȱemployingȱentityȱhasȱcontrolȱofȱaȱpensionȱplanȱitȱisȱnecessaryȱtoȱ determineȱwhetherȱtheȱofferȱofȱbenefitsȱisȱanȱindicatorȱofȱcontrolȱtoȱtheȱplanȱitself.ȱȱTheȱanalysisȱsetȱoutȱ aboveȱsuggestsȱthatȱtheȱemployerȱmakesȱtheȱofferȱofȱbenefitsȱandȱacceptsȱtheȱvariabilityȱassociatedȱwithȱ theȱoffer.ȱȱManagers/ȱ(trustees)ȱareȱnotȱnormallyȱpartyȱtoȱtheȱofferȱofȱbenefits;ȱhowever,ȱaȱtrusteeȱmayȱhaveȱ aȱroleȱinȱtheȱprotectionȱofȱbenefitsȱdependingȱonȱtheȱconstitutionȱofȱtheȱplanȱ(i.e.ȱthroughȱtheȱtrustȱdeed).ȱ Itȱwouldȱseemȱanȱemployerȱcontrolsȱtheȱofferȱofȱbenefitsȱandȱreceivesȱinȱexchangeȱforȱthatȱofferȱemployeeȱ services.ȱȱTheȱemployerȱacceptsȱvariabilityȱassociatedȱwithȱtheȱdeferredȱsettlementȱofȱtheȱliabilityȱthatȱ arisesȱinȱexchangeȱforȱservices.ȱȱȱ
3.57ȱ Itȱfollowsȱfromȱtheȱforegoingȱthatȱwhoȱhasȱaccessȱtoȱtheȱplanȱisȱnotȱnormallyȱanȱindicatorȱofȱ controlȱofȱaȱpensionȱplan;ȱnormallyȱanȱemployerȱcontrolsȱaccessȱtoȱtheȱplan.ȱ
(iii)ȱ ȱWhoȱbenefitsȱfromȱtheȱpensionȱplan?ȱ
3.58ȱ Asȱwithȱaboveȱitȱmightȱbeȱusefulȱtoȱconsiderȱtheȱemployerȱandȱemployeeȱseparately.ȱ
3.59ȱ Theȱemployee,ȱinȱexchangeȱforȱservices,ȱobtainsȱaȱremunerationȱofȱwhichȱsomeȱisȱdeferred.ȱȱTheȱ deferralȱisȱsometimesȱprotectedȱbyȱanȱintermediateȱentityȱȬȱtheȱpensionȱplan.ȱȱTheȱemployeeȱasȱaȱ beneficiaryȱofȱtheȱplanȱexpectsȱaȱpensionȱpaymentȱforȱemploymentȱservicesȱprovidedȱinȱtheȱpast.ȱȱTheȱ amountȱofȱpensionȱhoweverȱdependsȱonȱtermsȱagreedȱbyȱtheȱemployer.ȱȱThisȱwouldȱsuggestȱitȱisȱtheȱ employeeȱwhoȱbenefitsȱfromȱtheȱplan.ȱ
3.60ȱ Theȱemployer,ȱhavingȱmadeȱtheȱofferȱandȱacceptedȱtheȱemployees’ȱservicesȱhasȱaȱliabilityȱinȱrespectȱ ofȱaccruedȱbenefitsȱandȱassumesȱtheȱvariabilityȱassociatedȱwithȱsettlementȱofȱthisȱliability.ȱȱTheȱbenefitsȱ theȱemployerȱreceivesȱariseȱfromȱtheȱcontractȱofȱemploymentȱ(thatȱisȱtheȱdeliveryȱofȱserviceȱbyȱtheȱ
employee)ȱratherȱthanȱtheȱpensionȱplanȱitself.ȱȱTheȱemployerȱmayȱreceiveȱsomeȱbenefitsȱfromȱsponsorshipȱ ofȱtheȱplan,ȱsuchȱasȱtheȱabilityȱtoȱattractȱandȱretainȱstaff,ȱbutȱtheseȱareȱofȱanȱintangibleȱnature.ȱȱȱ
3.61ȱ Inȱcertainȱcircumstancesȱ(forȱinstanceȱwhereȱemployersȱandȱemployeesȱshareȱsurpluses)ȱtheȱ employerȱwillȱalsoȱbeȱaȱbeneficiaryȱtoȱtheȱpensionȱplan.ȱȱTheȱquestionȱthereforeȱarisesȱasȱtoȱwhetherȱtheȱ accessȱtoȱparticipateȱinȱsurplusȱprovidesȱevidenceȱasȱtoȱtheȱcontrolȱofȱtheȱpensionȱplan.ȱȱ
3.62ȱ Weȱhaveȱpreviouslyȱnotedȱtheȱroleȱofȱtheȱpensionȱplanȱisȱtoȱseparateȱtheȱpensionȱplan’sȱassetsȱ fromȱthoseȱofȱtheȱemployer,ȱprovidingȱsecurityȱtoȱtheȱemployer’sȱpensionȱpromise.ȱȱTheȱ
managers/(trustees)ȱofȱtheȱplanȱaimȱtoȱprotectȱtheseȱbenefitsȱthroughȱfundingȱandȱinvestmentȱstrategies.ȱȱ Thisȱisȱanȱimportantȱdistinctionȱ–ȱinȱsoȱmuchȱasȱtheȱroleȱofȱmanagers/(trustees)ȱisȱnotȱnormallyȱtoȱ
maximiseȱtheȱreturnȱonȱassetsȱtoȱtheȱpensionȱfundȱbutȱtoȱsecureȱandȱprotectȱbenefitsȱforȱtheȱplan’sȱ beneficiaries.ȱȱThisȱwouldȱsuggestȱthatȱaȱsurplusȱisȱaȱ“byȬproduct”ȱofȱtheȱplan’sȱprincipalȱroleȱandȱ thereforeȱwhereȱtheȱemployerȱbenefitsȱinȱthisȱmannerȱitȱcannotȱprovideȱevidenceȱasȱtoȱtheȱcontrolȱofȱtheȱ planȱitself.ȱȱ
3.63ȱ Theȱanalysisȱaboveȱsuggestsȱtheȱemployerȱdoesȱnotȱbenefitȱfromȱpensionȱplanȱitselfȱbutȱacceptsȱtheȱ variabilityȱassociatedȱwithȱsettlementȱofȱliabilitiesȱthatȱariseȱfromȱtheȱcontractȱofȱemployment.ȱȱTheȱ
variabilityȱisȱbothȱupsideȱ(i.e.ȱthroughȱreducedȱcontributionsȱorȱtheȱabilityȱtoȱparticipateȱinȱaȱsurplus)ȱorȱ downsideȱriskȱwhereȱincreasedȱfundingȱisȱrequested.ȱȱTheȱdownsideȱriskȱcanȱbeȱdemonstratedȱinȱrelationȱ toȱlongevityȱriskȱwhichȱisȱaȱsignificantȱfactorȱcontributingȱtoȱincreasingȱtheȱcostȱofȱpensionsȱandȱisȱaȱclearȱ riskȱthatȱemployersȱhaveȱassumed.ȱ
3.64ȱ ToȱdetermineȱcontrolȱofȱanȱentityȱtheȱIASB,ȱasȱpartȱofȱitsȱconsolidationȱproject,ȱplansȱtoȱassumeȱ thatȱtheȱentityȱthatȱabsorbsȱtheȱvariabilityȱofȱtheȱassetȱisȱtheȱpartyȱthatȱbenefitsȱfromȱtheȱasset.ȱȱTheȱ analysisȱaboveȱdoesȱnotȱcontradictȱthisȱargumentȱbecauseȱtheȱemployerȱmakesȱtheȱofferȱofȱpensionȱ benefitsȱinȱconsiderationȱforȱtheȱemployeeȱprovidingȱservicesȱ(andȱtherebyȱobtainsȱbenefitsȱfromȱ
employeeȱservice).ȱȱTheȱemployerȱhavingȱobtainedȱbenefitsȱthroughȱtheȱemploymentȱcontractȱacceptsȱtheȱ variabilityȱ(risk)ȱassociatedȱwithȱsettlementȱofȱthisȱliability.ȱȱȱ
3.65ȱ Inȱdeterminingȱwhoȱhasȱcontrolȱofȱtheȱpensionȱplan;ȱtheȱidentityȱofȱtheȱpartyȱthatȱbenefitsȱfromȱ theȱplanȱwillȱnotȱnormallyȱbeȱanȱindicatorȱofȱcontrolȱbecauseȱbyȱdefinitionȱtheȱroleȱofȱtheȱplanȱisȱtoȱ secureȱbenefitsȱtoȱbeneficiariesȱnotȱtoȱmaximiseȱreturnsȱtoȱtheȱemployer.ȱȱȱȱȱȱ
(iv)ȱ Investmentȱandȱfundingȱpolicyȱ
3.66ȱ Whereȱtheȱroleȱofȱtheȱplanȱisȱtoȱprotectȱtheȱbeneficiariesȱofȱtheȱplan,ȱmanagers/(trustees)ȱwillȱaimȱ toȱprotectȱtheȱbeneficiariesȱofȱtheȱpensionȱplanȱbyȱensuringȱtheȱplanȱisȱadequatelyȱfundedȱ(fundingȱpolicy)ȱ andȱthroughȱtheȱreturnsȱonȱtheȱassetsȱthatȱareȱheldȱbyȱtheȱplanȱ(investmentȱpolicy).ȱȱȱ
3.67ȱ Theȱfundingȱandȱinvestmentȱdecisionsȱthatȱtheȱtrusteesȱareȱableȱtoȱmakeȱhaveȱconsequencesȱonȱtheȱ employer,ȱi.e.ȱtheȱfundingȱrequirementsȱofȱtheȱschemeȱaffectȱtheȱeconomicȱresourcesȱthatȱareȱavailableȱtoȱ theȱentity.ȱȱTheȱinvestmentȱdecisionsȱhaveȱanȱaffectȱonȱtheȱamountȱofȱfundingȱthatȱwillȱbeȱrequiredȱbyȱtheȱ employerȱtoȱfulfilȱitsȱpensionȱobligations.ȱ
3.68ȱ Inȱsomeȱarrangementsȱtheȱbenefitȱtoȱtheȱemployeeȱisȱlinkedȱtoȱtheȱreturnȱonȱassets;ȱinȱtheseȱ circumstancesȱtheȱemployerȱmayȱguaranteeȱaȱreturnȱtoȱbeneficiariesȱofȱtheȱplan.ȱȱThisȱraisesȱaȱquestionȱ regardingȱwhoȱbenefitsȱfromȱtheȱassetsȱofȱtheȱplan.ȱȱAsȱnotedȱaboveȱtheȱinvestmentȱdecisionsȱaffectȱtheȱ fundingȱrequirementsȱfromȱtheȱemployerȱ–ȱgoodȱperformanceȱwillȱreduceȱtheȱamountȱofȱfundingȱ
required.ȱȱInȱwhichȱcase,ȱitȱmayȱbeȱarguedȱthatȱtheȱemployerȱbenefitsȱfromȱtheȱreturnȱonȱassets.ȱȱHowever,ȱ weȱhaveȱalsoȱnotedȱthatȱseparatingȱtheȱassetsȱtoȱfundȱpensionȱbenefitsȱfromȱtheȱemployerȱprovidesȱ
securityȱtoȱtheȱemployersȱpensionȱpromiseȱandȱtherebyȱtheȱreturnȱonȱassetsȱbenefitsȱschemeȱbeneficiaries.ȱȱ 3.69ȱ Inȱdeterminingȱwhoȱhasȱcontrolȱofȱtheȱpensionȱplanȱaȱcriticalȱconsiderationȱisȱwhichȱpartyȱhasȱ theȱabilityȱtoȱsetȱtheȱinvestmentȱandȱfundingȱpoliciesȱofȱtheȱplan.ȱȱ
Conclusionsȱonȱcontrolȱ
3.70ȱ InȱthisȱsectionȱweȱhaveȱsoughtȱtoȱidentifyȱifȱtheȱIASBȱlatestȱthinkingȱarisingȱfromȱitsȱconsolidationȱ projectȱcanȱbeȱappliedȱtoȱpensionȱplans.ȱȱAȱreportingȱentityȱwillȱhaveȱcontrolȱofȱaȱpensionȱplanȱwhereȱitȱ meetsȱtheȱIASB’sȱworkingȱdefinitionȱofȱcontrol,ȱthatȱis:ȱ
Whenȱitȱhasȱtheȱexclusiveȱrightsȱoverȱtheȱplan’sȱassetsȱandȱliabilitiesȱwhichȱgiveȱitȱaccessȱtoȱtheȱbenefitsȱofȱ thoseȱassetsȱandȱliabilitiesȱandȱtheȱabilityȱtoȱincrease,ȱmaintainȱandȱprotectȱtheȱamountȱofȱthoseȱbenefits.ȱ
3.71ȱ Inȱevaluatingȱwhetherȱaȱpensionȱplanȱformsȱpartȱofȱtheȱconsolidatedȱgroupȱweȱhaveȱidentifiedȱ indicatorsȱthatȱprovideȱevidenceȱanȱentityȱhasȱcontrolȱofȱtheȱpensionȱplan.ȱȱTheseȱinclude:ȱ
(a)ȱ whereȱtheȱemployerȱhasȱtheȱdecisionȱmakingȱpowersȱofȱtheȱplanȱandȱcanȱdirectȱ
managers/(trustees)ȱofȱtheȱpensionȱplan.ȱȱThisȱwillȱrequireȱconsiderationȱofȱallȱrelevantȱfactors,ȱ includingȱregulatoryȱinfluences,ȱandȱbeȱbasedȱonȱtheȱsubstanceȱofȱtheȱrelationshipȱbetweenȱtheȱ employerȱandȱtheȱpensionȱplan.ȱȱIndicatorsȱthatȱanȱemployerȱhasȱtheȱdecisionȱmakingȱpowersȱ ofȱtheȱplanȱmightȱinclude:ȱ
whereȱtheȱemployerȱcanȱappointȱandȱremoveȱtheȱmajorityȱofȱmanagers/(trustees)ȱatȱitsȱ discretion;ȱandȱ
whetherȱonceȱappointed,ȱmanagers/(trustees)ȱcanȱactȱonȱbehalfȱofȱtheȱemployerȱ(i.e.ȱtheȱ employerȱcanȱdirectȱtheȱactionsȱofȱmanagers/(trustees));ȱ
and/orȱ
(b) whereȱtheȱemployerȱcanȱdetermineȱtheȱinvestmentȱandȱfundingȱpoliciesȱofȱtheȱplanȱandȱ ȱcanȱ offerȱand/orȱchangeȱbenefitsȱwithoutȱtheȱneedȱtoȱconsultȱtheȱmanagers/(trustees)ȱofȱtheȱplan.ȱ ȱ
Anȱindicatorȱthatȱanȱemployerȱdoesȱnotȱhaveȱcontrolȱofȱtheȱplanȱisȱtheȱeffectȱofȱregulation,ȱ especiallyȱwhereȱregulationȱdeterminesȱappointmentȱofȱtrusteesȱandȱhowȱtrusteesȱshouldȱactȱ whenȱperformingȱtheirȱdutiesȱandȱthereforeȱrestrictsȱtheȱemployer’sȱabilityȱtoȱ“influence”ȱ trustees.ȱ
Summaryȱofȱviewsȱonȱconsolidationȱ
3.72ȱ InȱthisȱChapterȱweȱsoughtȱtoȱanswerȱtheȱquestionȱ–ȱshouldȱpensionȱplansȱbeȱconsolidatedȱinȱtheȱ financialȱstatementsȱofȱtheȱemployer.ȱȱTheȱanalysisȱinȱthisȱChapterȱsuggestsȱthereȱisȱnoȱconceptualȱreasonȱ whyȱexistingȱfinancialȱreportingȱstandardsȱprovideȱanȱexemptionȱfromȱtheȱconsolidationȱofȱpensionȱplans.ȱȱȱ 3.73ȱ Theȱnotionȱofȱcontrolȱ(thatȱisȱwhetherȱtheȱconsolidatedȱfinancialȱstatementsȱshouldȱincludeȱthoseȱ entitiesȱtheȱparentȱentityȱhasȱrightsȱoverȱthatȱentity’sȱassetsȱandȱliabilitiesȱwhichȱgiveȱitȱaccessȱtoȱtheȱ benefitȱofȱthoseȱassetsȱandȱliabilitiesȱandȱtheȱabilityȱtoȱincrease,ȱmaintainȱorȱprotectȱtheȱamountȱofȱthoseȱ benefits)ȱprovidesȱaȱsuitableȱmeansȱtoȱdetermineȱwhetherȱaȱplanȱshouldȱbeȱconsolidated.ȱȱ
3.74ȱ Theȱanalysisȱhasȱledȱtoȱtheȱdevelopmentȱofȱindicatorsȱtoȱdetermineȱwhetherȱtheȱemployingȱentityȱ hasȱcontrolȱofȱtheȱpensionȱplan.ȱȱTheȱuseȱofȱtheseȱindicatorsȱshouldȱassistȱinȱdeterminingȱifȱtheȱemployingȱ entityȱhasȱcontrolȱofȱtheȱpensionȱplanȱ–ȱinȱwhichȱinstanceȱconsolidationȱwouldȱbeȱrequired.ȱȱAlternativelyȱ theȱuseȱofȱtheȱindicatorsȱmayȱdetermineȱtheȱemployingȱentityȱdoesȱnotȱhaveȱcontrolȱ–ȱthatȱisȱcontrolȱofȱtheȱ planȱisȱwithȱanotherȱorȱheldȱbyȱtheȱmanagers/(trustees)ȱofȱtheȱplanȱitself.ȱ
3.75ȱ Theȱapplicationȱofȱtheȱnotionȱofȱcontrolȱwouldȱresultȱinȱsomeȱpensionȱplansȱ(thoseȱthatȱareȱ
controlledȱbyȱtheȱreportingȱentity)ȱbeingȱconsolidatedȱintoȱtheȱgroupȱfinancialȱstatementsȱ–ȱwhereasȱotherȱ plansȱanȱentityȱparticipatesȱinȱwouldȱnotȱbeȱconsolidated.ȱȱItȱmightȱbeȱarguedȱthatȱitȱgivesȱriseȱtoȱaȱlevelȱofȱ inconsistencyȱinȱfinancialȱreportingȱthatȱisȱnotȱhelpful.ȱȱHowever,ȱifȱtheȱcriteriaȱforȱconsolidationȱwereȱ foundedȱonȱappropriateȱeconomicȱprinciples,ȱthenȱallȱplansȱinȱsimilarȱeconomicȱrelationshipsȱwithȱ employersȱwouldȱbeȱeitherȱconsolidatedȱorȱnotȱconsolidatedȱasȱappropriate.ȱȱ
3.76ȱ Whereȱitȱisȱdeterminedȱthatȱanȱentityȱdoesȱhaveȱcontrolȱofȱtheȱplanȱthenȱconsolidationȱofȱtheȱplanȱ willȱresultȱinȱtheȱassetsȱandȱliabilitiesȱofȱtheȱplanȱbeingȱpresentedȱ“gross”ȱinȱtheȱemployer’sȱconsolidatedȱ financialȱstatements.ȱȱ
4 Summary
4.1ȱ ThisȱChapterȱconsidersȱhowȱobligationsȱtoȱprovideȱpensionȱbenefitsȱandȱassetsȱheldȱtoȱpayȱsuchȱ benefitsȱshouldȱbeȱreflectedȱinȱtheȱfinancialȱstatementsȱofȱanȱemployerȱandȱofȱaȱpensionȱplan.ȱȱItȱconsidersȱ anȱemployer’sȱindividualȱandȱconsolidatedȱfinancialȱstatements.ȱȱȱȱ
Individualȱfinancialȱstatementsȱ
4.2ȱ Ifȱtheȱemployingȱentityȱisȱdirectlyȱresponsibleȱforȱpayingȱtheȱbenefitsȱpromisedȱtoȱemployees,ȱtheȱ liabilityȱmustȱrestȱdirectlyȱwithȱtheȱemployingȱentity.ȱȱ(Paragraphsȱ2.4Ȭ2.6)ȱ
4.3ȱ Whereȱaȱpensionȱisȱprovidedȱbyȱaȱthirdȱpartyȱ(suchȱasȱinsuranceȱcompany)ȱsomeȱorȱallȱofȱtheȱ employer’sȱpresentȱobligationȱtoȱtheȱemployeeȱisȱextinguishedȱbyȱtransferringȱassetsȱ(i.e.ȱpayingȱagreedȱ contributions)ȱtoȱthatȱthirdȱparty.ȱȱ(Paragraphsȱ2.7Ȭ2.18)ȱ
4.4ȱ Whereȱaȱfundȱofȱassetsȱisȱestablishedȱwhichȱisȱnotȱtransferredȱtoȱaȱseparateȱentityȱ(i.e.ȱitȱisȱsimplyȱaȱ collectionȱofȱassetsȱofȱtheȱemployingȱentity):ȱ
x theȱassetsȱheldȱinȱtheȱfundȱareȱreportedȱasȱassetsȱofȱtheȱemployingȱentityȱinȱitsȱindividualȱfinancialȱ statements;ȱandȱ
x theȱobligationȱtoȱpayȱbenefitsȱisȱaȱliabilityȱofȱtheȱemployingȱentityȱ(i.e.ȱitȱisȱnotȱaȱliabilityȱofȱanyȱ otherȱreportingȱentity).ȱ
(Paragraphsȱ2.23Ȭ2.27)ȱ
4.5ȱ WhereȱassetsȱareȱtransferredȱfromȱtheȱemployerȱtoȱanȱemployerȬsponsoredȱplan:ȱȱ
x Ifȱtheȱemployerȱhasȱtheȱlegalȱorȱconstructiveȱobligationȱtoȱpayȱbenefits,ȱitȱwillȱhaveȱaȱliabilityȱtoȱ payȱbenefitsȱandȱalsoȱanȱasset,ȱrepresentingȱitsȱrightȱtoȱreimbursementȱfromȱtheȱplan.ȱȱ(Paragraphsȱ 2.34Ȭ2.38)ȱ
x Ifȱtheȱplanȱassumesȱtheȱobligationȱtoȱpayȱbenefitsȱandȱtheȱemployerȱhasȱanȱobligationȱtoȱmakeȱ contributionsȱtoȱtheȱplanȱtoȱtheȱextentȱthatȱtheȱplan’sȱobligationsȱcannotȱbeȱmetȱfromȱitsȱownȱ assets,ȱtheȱassetȱorȱliabilityȱthatȱisȱproperlyȱrepresentativeȱofȱtheȱemployer’sȱrightsȱandȱobligationsȱ isȱaȱnetȱassetȱorȱliabilityȱthatȱreflectsȱitsȱrightȱtoȱbenefitȱfromȱaȱsurplusȱorȱitsȱobligationȱtoȱ contributeȱtoȱaȱdeficit.ȱȱ(Paragraphsȱ2.39Ȭ2.42)ȱ
4.6ȱ TheȱreasonsȱforȱtheȱpresentȱrequirementȱofȱIASȱ19ȱtoȱgiveȱaȱnetȱpresentationȱinȱsomeȱ
circumstancesȱwhereȱtheȱemployerȱhasȱaȱdirectȱobligationȱtoȱpayȱbenefitsȱdoȱnotȱseemȱtoȱbeȱconvincingȱ andȱshouldȱbeȱreconsidered.ȱȱAȱgrossȱpresentationȱwouldȱappropriatelyȱreflectȱtheȱeconomicȱsubstanceȱ andȱbeȱconsistentȱwithȱaccountingȱprinciplesȱthatȱareȱappliedȱelsewhere.ȱȱ(Paragraphsȱ2.43Ȭ2.46)ȱ Theȱemployer’sȱconsolidatedȱfinancialȱstatementsȱ
4.7ȱ Thereȱisȱnoȱconceptualȱreasonȱwhyȱfinancialȱreportingȱstandardsȱshouldȱprovideȱanȱexemptionȱ fromȱtheȱconsolidationȱofȱpensionȱplans.ȱȱWhereȱaȱpensionȱplanȱisȱpartȱofȱaȱsingleȱeconomicȱentityȱ(theȱ group)ȱthenȱtheȱusefulnessȱofȱtheȱinformationȱinȱtheȱemployer’sȱfinancialȱstatementsȱisȱimprovedȱifȱtheȱ pensionȱplanȱisȱconsolidated.ȱȱ(Paragraphsȱ3.3Ȭ3.22)ȱ
4.8ȱ Whereȱitȱisȱdeterminedȱthatȱanȱentityȱdoesȱhaveȱcontrolȱofȱtheȱplanȱthenȱconsolidationȱofȱtheȱplanȱ willȱresultȱinȱtheȱassetsȱandȱliabilitiesȱofȱtheȱplanȱbeingȱpresentedȱ“gross”ȱinȱtheȱemployer’sȱconsolidatedȱ financialȱstatements.ȱȱ(Paragraphsȱ3.14Ȭ3.22)ȱ
4.9ȱ Theȱnotionȱofȱcontrolȱ(basedȱonȱwhetherȱtheȱemployerȱhasȱrightsȱoverȱtheȱplan’sȱassetsȱandȱ liabilitiesȱwhichȱgiveȱitȱaccessȱtoȱtheȱbenefitȱofȱthoseȱassetsȱandȱliabilitiesȱandȱtheȱabilityȱtoȱincrease,ȱ maintainȱorȱprotectȱtheȱamountȱofȱthoseȱbenefits)ȱprovidesȱaȱsuitableȱmeansȱtoȱdetermineȱwhetherȱaȱplanȱ shouldȱbeȱconsolidated.ȱȱ(Paragraphsȱ3.23Ȭ3.35)ȱ
4.10ȱ Controlȱmayȱariseȱwhereȱtheȱemployerȱhasȱtheȱdecisionȱmakingȱpowersȱofȱtheȱplanȱandȱcanȱdirectȱ managers/(trustees)ȱofȱtheȱpensionȱplanȱorȱcanȱdetermineȱinvestment,ȱfundingȱorȱbenefitȱpolicy.ȱȱ
Determinationȱofȱthisȱwillȱrequireȱconsiderationȱofȱallȱrelevantȱfactors,ȱincludingȱregulatoryȱinfluences,ȱ andȱbeȱbasedȱonȱtheȱsubstanceȱofȱtheȱrelationshipȱbetweenȱtheȱemployerȱandȱtheȱpensionȱplan.ȱȱ
(Paragraphsȱ3.36Ȭ3.71)ȱ
4.11ȱ Theȱapplicationȱofȱtheȱnotionȱofȱcontrolȱwouldȱresultȱinȱsomeȱpensionȱplansȱbeingȱconsolidatedȱ intoȱtheȱgroupȱfinancialȱstatementsȱ–ȱwhereasȱotherȱplansȱinȱwhichȱanȱentityȱparticipatesȱmightȱnotȱbeȱ consolidated.ȱȱItȱmightȱbeȱarguedȱthatȱthisȱgivesȱriseȱtoȱinconsistency.ȱȱHowever,ȱifȱtheȱcriteriaȱforȱ consolidationȱareȱfoundedȱonȱappropriateȱprinciples,ȱthenȱtheȱaccountingȱtreatmentȱwouldȱreflectȱtheȱ economicȱsubstanceȱofȱtheȱrelationshipȱbetweenȱtheȱentityȱandȱallȱitsȱplans.ȱȱ(Paragraphȱ3.75)ȱ
APPENDIX A Specialȱpurposeȱentitiesȱ
ȱA.1ȱ Whereȱtheȱ“traditionalȱcontrol”ȱmodelȱdoesȱnotȱholdȱtrueȱitȱisȱnecessaryȱtoȱconsiderȱalternativeȱ
approachesȱtoȱconsolidation.ȱȱEntitiesȱthatȱdoȱnotȱconformȱtoȱtheȱ“traditionalȱcontrol”ȱmodelȱapproachȱareȱ sometimesȱreferredȱtoȱasȱspecialȱpurposeȱentitiesȱ(SPEs).ȱȱ
A.2ȱ IFRSsȱdoȱnotȱcontainȱaȱdefinitionȱofȱSPEsȱbutȱSICȱ12ȱ‘Consolidationȱ–ȱSpecialȱPurposeȱEntities’ȱ addressesȱtheȱcircumstancesȱinȱwhichȱanȱentityȱshouldȱconsolidateȱaȱSPE.ȱȱSICȱ12ȱisȱconsistentȱwithȱIASȱ27ȱ inȱthatȱitȱusesȱcontrolȱasȱaȱunifyingȱfactorȱforȱconsolidation.ȱȱHowever,ȱSICȱ12ȱisȱappliedȱwhenȱitȱisȱnotȱ possible,ȱapplyingȱtheȱnormalȱprovisionsȱofȱIASȱ27,ȱtoȱdetermineȱwhoȱhasȱcontrol.ȱȱSICȱ12ȱrequiresȱ
consolidationȱwhereȱtheȱsubstanceȱofȱtheȱrelationshipȱbetweenȱanȱentityȱandȱaȱSPEȱindicatesȱtheȱentityȱhasȱ controlȱofȱtheȱSPE.ȱToȱdetermineȱwhetherȱtheȱSPEȱisȱcontrolledȱbyȱthatȱentityȱjudgementȱisȱrequiredȱbyȱ consideringȱrelevantȱfactors.ȱȱInȱadditionȱSICȱ12ȱprovidesȱsomeȱindicatorsȱofȱcontrol,ȱtheseȱinclude:ȱ (a) whereȱinȱsubstance,ȱtheȱactivitiesȱofȱtheȱSPEȱareȱbeingȱconductedȱonȱbehalfȱofȱtheȱentityȱaccordingȱ
toȱitsȱspecificȱbusinessȱneedsȱsoȱthatȱtheȱentityȱobtainsȱbenefits;ȱȱ
(b) inȱsubstance,ȱtheȱentityȱhasȱtheȱdecisionȬmakingȱpowersȱtoȱobtainȱtheȱmajorityȱofȱtheȱbenefitsȱofȱ theȱactivitiesȱofȱtheȱSPEȱor,ȱbyȱsettingȱupȱanȱ‘autopilot’ȱmechanism,ȱtheȱentityȱhasȱdelegatedȱtheseȱ decisionȬmakingȱpowers;ȱ
(c) inȱsubstance,ȱtheȱentityȱhasȱrightsȱtoȱobtainȱtheȱmajorityȱofȱtheȱbenefitsȱofȱtheȱSPEȱandȱthereforeȱ mayȱbeȱexposedȱtoȱriskȱincidentȱtoȱtheȱactivitiesȱofȱtheȱSPE;ȱorȱ
(d) inȱsubstance,ȱtheȱentityȱretainsȱtheȱmajorityȱofȱtheȱresidualȱorȱownershipȱrisksȱrelatedȱtoȱtheȱSPEȱofȱ itsȱassetsȱinȱorderȱtoȱobtainȱbenefitsȱfromȱitsȱactivities.ȱȱ
A.3ȱ TheȱfirstȱindicatorȱaboveȱfocusesȱonȱbenefitsȱandȱisȱsimilarȱtoȱFRSȱ5ȱ‘Reportingȱtheȱsubstanceȱofȱ Transactions’ȱwhichȱstates:ȱ
ȱ WhereȱtheȱfinancialȱandȱoperatingȱpoliciesȱofȱaȱvehicleȱareȱinȱsubstanceȱpreȬdetermined,ȱ
contractuallyȱorȱotherwise,ȱtheȱpartyȱpossessingȱcontrolȱwillȱbeȱtheȱoneȱthatȱgainsȱbenefitsȱarisingȱ fromȱtheȱnetȱassetsȱofȱtheȱvehicle.ȱȱEvidenceȱofȱwhichȱpartyȱgainsȱtheseȱbenefitsȱisȱgivenȱbyȱwhichȱ partyȱisȱexposedȱtoȱtheȱriskȱinherentȱinȱthem.ȱ
A.4ȱ TheȱsecondȱindicatorȱisȱaboutȱdecisionȱmakingȱpowersȱsoȱasȱtoȱcontrolȱtheȱSPEȱandȱdiscussesȱ autopilots.ȱȱSomeȱholdȱtheȱviewȱthatȱpensionȱplansȱfallȱwithinȱtheȱcategoryȱofȱautopilots.ȱȱThoseȱthatȱholdȱ thisȱviewȱconsiderȱthatȱpensionȱplansȱareȱestablishedȱforȱaȱspecifiedȱpurposeȱandȱthatȱtheȱdutiesȱandȱ responsibilitiesȱofȱtrusteesȱwereȱdefinedȱ(andȱtherebyȱlimited)ȱinȱtheȱtrustȱdeed.ȱȱTheyȱconsiderȱthatȱanȱ entityȱhasȱtheȱdecisionȱmakingȱpowersȱandȱobtainsȱtheȱbenefitsȱfromȱtheȱprovisionȱofȱservicesȱunderȱtheȱ
contractȱforȱemploymentȱ–ȱpensionsȱareȱmerelyȱdeferredȱremuneration.ȱȱȱ
A.5ȱ Theȱthirdȱandȱfourthȱindicatorsȱareȱaboutȱriskȱ–ȱinȱtheseȱcircumstancesȱanȱSPEȱisȱlikelyȱtoȱbeȱaȱ subsidiaryȱwhereȱtheȱoriginatorȱ(parent)ȱretainsȱtheȱmajorityȱofȱtheȱresidualȱorȱownershipȱrisks.ȱȱThisȱmayȱ beȱdeterminedȱbyȱevaluatingȱtheȱrisksȱofȱeachȱpartyȱengagingȱinȱtransactionsȱwithȱtheȱSPE.ȱ
A.6ȱ AnȱalternativeȱapproachȱtoȱSICȱ12ȱisȱusedȱinȱUSȱGAAPȱFINȱ46(R)ȱ‘ConsolidationȱofȱVariableȬ InterestȱEntities’ȱ(VIE).ȱȱUnderȱFINȱ46(R)ȱanȱentityȱisȱrequiredȱtoȱconsolidateȱaȱVIEȱifȱtheȱentityȱhasȱaȱ variableȱinterestȱ(orȱaȱcombinationȱofȱvariableȱinterests)ȱthatȱwillȱabsorbȱaȱmajorityȱofȱtheȱentity’sȱexpectedȱ losses,ȱreceiveȱaȱmajorityȱofȱtheȱentity’sȱexpectedȱresidualȱreturns,ȱorȱboth.ȱȱ‘Variableȱinterests’ȱinȱaȱVIEȱareȱ contractual,ȱownershipȱorȱotherȱpecuniaryȱinterestsȱinȱanȱentityȱthatȱchangeȱwithȱchangesȱinȱtheȱfairȱvalueȱ ofȱtheȱentity’sȱnetȱassetsȱexclusiveȱofȱvariableȱinterests.ȱȱAnȱenterpriseȱthatȱconsolidatesȱaȱVIEȱisȱcalledȱtheȱ primaryȱbeneficiary.ȱ
A.7ȱ TheȱIASBȱisȱattemptingȱtoȱdevelopȱaȱsingleȱcontrolȱmodelȱwhichȱcanȱbeȱappliedȱwhereȱtheȱ traditionalȱcontrolȱmodelȱholdsȱtrueȱandȱalsoȱtoȱSPEs.ȱTheȱproposedȱmodelȱwillȱdetermineȱcontrolȱbyȱ identifyingȱwhichȱentityȱisȱexposedȱtoȱrisksȱandȱrewardsȱ(andȱthereforeȱabsorbsȱtheȱvariability).ȱȱThisȱ modelȱisȱconsistentȱwithȱtheȱFINȱ46ȱ(R)ȱinȱthatȱitȱusesȱvariabilityȱinȱanȱattemptȱtoȱidentifyȱtheȱcontroller.ȱȱ A.8ȱ InȱdevelopingȱtheȱcontrolȱmodelȱtheȱIASBȱstaffȱplanȱtoȱdevelopȱindicatorsȱthatȱevidenceȱtheȱnatureȱ ofȱtheȱrelationshipȱbetweenȱtheȱinvestorȱandȱtheȱinvestee.ȱȱIndicatorsȱmightȱinclude:ȱ
x theȱabilityȱtoȱdominateȱtheȱgoverningȱbody,ȱandȱthereforeȱtheȱstrategicȱpolicyȱdecisionȱprocess;ȱ x theȱabilityȱtoȱparticipateȱinȱtheȱmanagementȱofȱanȱentity;ȱorȱ
x theȱabilityȱtoȱaccessȱtheȱresidualȱassetsȱofȱanȱentity.ȱȱ ȱ
ȱ ȱ ȱ ȱ ȱ
1.1ȱ PreviousȱChaptersȱofȱthisȱdiscussionȱpaperȱhaveȱconsideredȱhowȱtheȱliabilitiesȱtoȱpayȱpensionȱ benefitsȱandȱtheȱassetsȱthatȱareȱheldȱtoȱfundȱthoseȱbenefitsȱmightȱbeȱdefined.ȱȱTheȱnextȱstepȱisȱtoȱconsiderȱ theȱrecognitionȱofȱtheseȱassetsȱandȱliabilities.ȱ
1.2ȱ Thereȱhasȱhistoricallyȱbeenȱmuchȱdebateȱconcerningȱtheȱrecognitionȱofȱassetsȱandȱliabilitiesȱinȱ relationȱtoȱtheȱprovisionȱofȱpensionȱbenefits.ȱȱForȱexample,ȱtheȱissueȱbyȱtheȱASBȱofȱȱFRSȱ17ȱ‘Retirementȱ Benefits’ȱwhichȱrequiresȱpensionȱassetsȱandȱliabilitiesȱtoȱbeȱrecognisedȱimmediatelyȱandȱinȱfullȱwasȱ controversial.ȱȱ
1.3ȱ TheȱIASBȱFrameworkȱstatesȱthatȱrecognitionȱisȱtheȱprocessȱofȱincorporatingȱinȱtheȱbalanceȱsheetȱorȱ incomeȱstatementȱanȱitemȱthatȱmeetsȱtheȱdefinitionȱofȱanȱelementȱandȱsatisfiesȱtheȱcriteriaȱforȱrecognitionȱ asȱsetȱoutȱinȱtheȱFramework.ȱȱȱRecognitionȱisȱthereforeȱdistinctȱfromȱpresentation—thatȱisȱhowȱitemsȱthatȱ areȱrecognisedȱareȱportrayedȱwithinȱfinancialȱstatements.ȱȱThisȱChapterȱisȱconcernedȱonlyȱwithȱ
recognition:ȱpresentationȱisȱdiscussedȱinȱChapterȱ8.ȱȱȱ
1.4ȱ TheȱnextȱsectionȱofȱthisȱChapterȱdiscussesȱwhatȱtheȱFrameworkȱhasȱtoȱsayȱonȱrecognitionȱinȱmoreȱ detail.ȱȱȱ